German government unboxes licence boxes

A law that aims to limit the attractiveness of “license box” companies came into force

Up to now multinationals have frequently taken advantage of “license boxes” (also referred to as patent boxes or IP boxes) outside Germany. These license boxes are regularly used for preferential tax treatment in foreign countries (particularly in Malta, the Netherlands, Belgium, and Switzerland) on profits generated from the exploitation of patents, licenses, concessions, and trademark rights. The German company then pays royalties to the foreign patent box company for the use of the rights held abroad. These royalties are subsequently deducted as operating expenses in Germany, which creates a tax advantage over the years. The act introduced a “license barrier” in Germany, which is set to apply to some 650 companies. Expected tax revenues amount to no less than EUR 900 million.

According to the act (Gesetz zur Bekämpfung der Steuerumgehung und zur Änderung weiterer steuerlicher Vorschriften [Steuerumgehungsbekämpfungsgesetz – StUmgBG]), intra-group expenses for patents, licenses, concessions, and trademark rights will no longer be tax deductible in Germany as of next year if those payments are tax free or subject to a low tax rate at the level of the benefiting foreign entity. The act provides: “Taxes are to be owed to the State in which the activity creating value takes place, and not to the State offering the highest tax incentives”. The new statutory provisions are based on an action plan in line with the Organisation for Economic Co-operation and Development’s approach against harmful tax competition among states.

The only exception to the limitations on tax deductible licence payments will be allowed by the “nexus” approach: Accordingly, the use of license or patent boxes continues to be permitted if the company benefitting from tax incentives is actively engaged in developing the relevant IP. This does, however, not apply, for example, in cases in which the right which is the subject of the licence has been acquired or developed by related entities, or has been obtained by the granting of trademark rights.